ECONOMY REPORT - JAPAN (Extracted from 2001 Economic Outlook) REAL GROSS DOMESTIC PRODUCT The Japanese economy was on a gradual recovery from the trough of the business cycle in April 1999, helped by both fiscal and financial policy efforts. In the course of this recovery, production and corporate profits had recovered, and business investment had also started to rebound. Real GDP increased by 1.0 percent in fiscal 2000, following the 1.4 percent increase in fiscal 1999 and the negative growth (-0.6 percent) in fiscal 1998. However, exports and production have been on a decline, affected by the slowdown of the world economy. The economy is deteriorating again. Real GDP grew by only 0.1 percent in the January March quarter of 2001 compared to the previous quarter, mainly because of the negative growth of non-residential investment, residential investment and net exports of goods and services. The short-term prospects are further suppressed by the rise in business inventory. To counter these negative trends, the "Basic Policy for Economic Reform of the Japanese Economy: Basic Policies for Macroeconomic Management" was advocated first by the Council on Economic and Fiscal Policy and then adopted by the Japanese government on 26 June. The underlying philosophy is that "there can be no growth for Japan without structural reform." According to these new policies, the government is to carry out bold and persistent structural reform to revitalise the economy, which include drastic resolution of the non-performing loans and implementation of a package of proactive structural reforms. Under such policy response, the adjustment pressure of structural reforms is likely to emerge in the short run, to offset any positive effect of the reform measures on GDP growth. For that reason, the growth prospect for fiscal 2001 will be well below the official estimate (1.7 percent: fiscal year) that was initially forecast in December 2000. INFLATION Prices have been continuously dropping, mainly because of weak domestic demand further compounded by the effects of deregulation. A mild deflationary trend emerged, with domestic wholesale prices dropping slightly by 1.0 percent in fiscal 1999 and staying almost unchanged in fiscal 2000 (an increase of 0.1 percent in calendar year 2000). Since the beginning of 2001, renewed downward pressure was felt, as the prices of electric machinery and steel softened. Consumer prices have been declining slightly since the fall of 2000 due to the fall in the prices of textile products and food services. They declined by 0.5 percent in fiscal 2000 (a decline of 0.7 percent in calendar year 2000). EMPLOYMENT
The employment situation remains severe, with the unemployment rate hitting an all-time high. The number of job offers and overtime hours worked are edging downward. Unemployment for fiscal 2000 was 4.7 percent. Though the rate declined slightly from 4.9 percent in December 2000 and January 2001 to 4.7 percent in February and March, it rose back to 4.9 percent in May and June, and further to 5.0 percent in July. New job offers increased by 20.0 percent in fiscal 2000. Compared to the same month of the previous year, they decreased in June 2001 by 1.1 percent after consecutive increases up to May 2001, and increased by 3.1 percent in July. Compared to the previous quarter, they increased by 1.1 percent in the April June quarter after decreasing by 6.3 percent in the January March quarter. In addition, the number of employees remained unchanged. The number of people in the workforce has decreased due to a decline in the number of self-employed and family workers. EXTERNAL TRADE ACCOUNTS Exports, especially of electrical devices such as semiconductors, are decreasing against the backdrop of the global economic slowdown. Export volume increased by 9.4 percent in calendar year 2000. However, it then decreased by 3.1 percent in the January March quarter of 2001 compared to the previous quarter (a decrease of 4.4 percent compared to the same quarter of the previous year), and it significantly decreased by 6.2 percent in the April June quarter of 2001 compared to the previous quarter (a decrease of 11.1 percent compared to the same quarter in the previous year). Imports, especially of IT-related goods such as semiconductors, have also been declining, reflecting slower demand for IT-related goods. Import volume increased by 11.0 percent in calendar year 2000. However, after dropping by 2.0 percent in the January March quarter of 2001 compared to the previous quarter (an increase of 6.3 percent compared to the same quarter of the previous year), it decreased by 2.9 percent in the April June quarter compared to the previous quarter (a decrease of 0.3 percent compared to the same quarter of the previous year). The surplus in the trade and services account is decreasing. It was 336.5 billion yen (preliminary figure) in April, although it reached 64.8 billion yen in May, as exports decreased faster than imports. In fiscal 2001, the surplus in trade and services as well as the current account surplus is projected to decline somewhat. The current account surplus will amount to 2.3 percent of GDP. GROSS EXTERNAL DEBT Despite a continuous current account surplus, the net external assets decreased to 84.7 trillion yen at the end of 1999, a figure far below the 133.3 trillion yen at the end of 1998, as a result of the appreciation of the yen and the increase in the appraised values of shares held by foreigners (debts). In addition, gross external assets amounted to 308 trillion yen while gross external debt registered at 223 trillion yen at the end of 1999.
EXCHANGE RATE The exchange rate of the yen against the U.S. dollar fell from the beginning of 1999 and reached 124 yen in May, then rose to 102 yen in December. The yen moved broadly in a range between 105 yen and 111 yen in 2000. The yen began to fall in December 2000 and reached a low of 126 yen in early April 2001. After that the yen moved broadly in a range between 119 yen and 125 yen. FISCAL POLICY Fiscal policy played a major role in supporting economic activities. In October 2000, the government launched "The Policy Package for New Economic Development Toward the Rebirth of Japan" to avoid a sharp drop in public demand, to reinforce the advance of the Japanese economy toward a self-sustained recovery path, and to build an economy and society that match the needs of the 21st century. In accordance with the new policy package, a supplementary budget of 3.9 trillion yen was compiled in fall 2000 to cover the cost of measures to develop infrastructures for 1) the IT revolution, 2) a recycling society, 3) the ageing of society, and 4) urban development. It also aims at financing small and medium-sized enterprises, housing loans and employment plans. The fiscal 2000 supplementary budget amounted to 89.8 trillion yen, an increase of 0.8 percent over the supplementary budget of the previous fiscal year (the initial budget was an increase of 3.8 percent from the fiscal 1999 initial budget.) The amount of issue of bonds in fiscal 2000 was about 33.0 trillion yen, with the percentage of government bond issues to total government expenditures being about 36.9 percent (42.1 percent in fiscal 1999) and the outstanding government bonds reaching 367.6 trillion yen (about 72 percent of GDP.) The fiscal 2001 budget was passed in March 2001. Efforts were made to maintain the same overall size of public works as in the initial budget for fiscal 2000, and steps would be taken for the appropriate implementation of the fiscal 2001 budget while considering the fiscal situation of local governments. On 26 June, based on the current cabinet s philosophy that "there can be no growth for Japan without structural reform," the cabinet decided the "Basic Policy for Economic Reform of the Japanese Economy: Basic Policies for Macroeconomic Management"(Basic Policy). Basic Policy has set a medium-term goal of achieving primary balance to balance benefits and burdens among generations and to restore medium- to long-term sustainability of fiscal conditions. As for fiscal 2002 budget, Basic Policy calls for the first step in medium-term fiscal consolidation, where the goal of containing JGB issues to no more than 30 trillion yen is established. MONETARY POLICY In March 2001, the Bank of Japan (BOJ) made a decision to shift to a monetary operation that targets monetary aggregates until the ongoing decline in prices ends. As a consequence,
it is anticipated that the uncollateralised overnight call rate will significantly decline from the current target level of 0.15 percent and stay close to zero percent under normal circumstances. Henceforth, while maintaining consistency with the basic principles of the government's economic policies, it is necessary for the Bank of Japan to take appropriate flexible monetary policies. As for the short-term interest rate, the uncollateralised overnight call rate had stayed around the level of the target rate (0.25 percent) since the termination of the zero-interest-rate policy by BOJ in August 2000, but around the level of 0.15 percent until the middle of March 2001 due to the target rate cut (from 0.25 percent to 0.15 percent) at the end of February 2001. Subsequently, it further declined and stayed at the level of 0.01 percent in August as a result of the measures for further monetary easing taken by BOJ in March 2001. The long-term interest rate, partly due to the market view of concerns over economic prospects, has been on a downward trend since the fall of 2000. Having significantly declined in March 2001 as a result of the measures for monetary easing taken by BOJ, it increased at the end of that month. MEDIUM-TERM OUTLOOK The Cabinet adopted an economic plan in July 1999 that outlined the long-term perspective of the Japanese economy and society up to 2010. In the annex to that plan, the prospects of the main economic indicators up to 2010 are given as follows: Real growth rate: approximately 2 percent Inflation rate and CPI: approximately 2 percent Unemployment rate: 3.5 percent to 4.5 percent As a result of progress in structural reforms, the disposal of non-performing loans will cause low growth for the next two or three years, but, after that, in the medium run, the Japanese economy is expected to show a gradual recovery led by private demand. Annex I JAPAN: OVERALL ECONOMIC PERFORMANCE 1995 1996 1997 1998 1999 2000 GDP and Major Components (percent change, year over year, except as noted) Nominal GDP (level in US$ billion) 5,297 4,692 4,310 3,965 4,522 4,748 Real GDP 1.6 3.5 1.8-1.1 0.8 1.5
Consumption 2.0 2.5 0.9 0.5 1.8 1.2 Private Consumption 1.4 2.4 0.8 0.1 1.2 0.5 Government Consumption 4.3 2.8 1.3 1.9 4.0 3.6 Investment 2.4 7.6 0.8-6.0-1.6 1.0 Private Investment 3.3 7.8 5.2-7.3-4.0 4.4 Government Investment 0.4 7.3-9.6-2.6 4.9-7.0 Exports of Goods and Services 4.1 6.5 11.2-2.3 1.4 12.1 Imports of Goods and Services 12.8 13.2 1.2-6.8 3.0 9.9 Fiscal and External Balance (percent of GDP) Budget Balance *# -6.3-6.2-5.4-7.2-8.2 N.A. Merchandise Trade Balance 2.5 1.8 2.4 3.1 2.7 2.5 Current Account Balance 2.1 1.4 2.2 3.1 2.4 2.5 Capital Account Balance -1.3-0.7-2.8-3.4-1.1-1.8 Economic Indicators (percent change, year over year, except as noted) GDP Deflator -0.4-0.8 0.4-0.1-1.4-1.6 CPI 1995=100-0.1 0.1 1.8 0.6-0.3-0.7 M2 3.0 3.3 3.1 4.0 3.6 2.1 Short-term Interest Rate (percent) + 1.2 0.6 0.6 0.7 0.2 0.2 Real Effective Exchange Rate (level, 1997=100) 124.3 105.6 100.0 99.7 108.8 114.8 Unemployment Rate (percent) 3.2 3.4 3.4 4.1 4.7 4.7 Population (millions) 125.6 125.9 126.2 126.5 126.7 126.9 Notes : N.A. Not available. In 2000, the System of National Accounts was changed from the 68SNA to 93SNA, and the benchmark year was also changed from 1990 to 1995. * Budget balance refers to general government. It excludes the social security.
# The 1998 Budget Balance is -12.3 percent if including fiscal deficit resulting from the General Account's assumption of the debts of the Japan National Railway Settlement Corporation and the National Forest Service. + Short-term interest rate refers to 3-months certificates of deposits (CDs). Annex II JAPAN: FORECAST SUMMARY (percent change from previous year) 2001 2002 Official IMF Link OECD Official IMF Link OECD Real GDP Exports Imports CPI 1.7-0.5 0.7 1.0 N.A. 0.2 1.1 1.1 4.0 N.A. 1.5 3.4 N.A. N.A. 2.8 8.3 5.3 N.A. 3.2 5.7 N.A. N.A. 3.1 5.3-0.2-0.7-0.7 * -0.7 * N.A. -0.7-0.5 * -0.5 * Notes : As at 30 August 2001. * Private consumption deflator. N.A. Not available. Sources: IMF forecasts, The World Economic Outlook Database (September 2001). LINK forecasts, Project LINK World Economic Outlook (April 2001). OECD forecasts, OECD Economic Outlook (June 2001). Annex III JAPAN: MEDIUM-TERM TREND FORECAST ( percent) 2010 Real GDP 2.0 CPI 2.0
Source: Ideal Socioeconomy and Policies for Economic Rebirth, Government of Japan (1999). Source: http://www.apecsec.org.sg/ 2002